Saudi Ara­bia opens US$585 bil­lion stock mar­ket for di­rect for­eign in­vest­ment


Saudi Ara­bia’s stock mar­ket, val­ued at US$585 bil­lion, opened up to di­rect for­eign in­vest­ment for the first time Mon­day, as the king­dom seeks an eco­nomic boost amid low global oil prices.

The open­ing of the Tadawul Saudi Stock Ex­change al­lows com­pa­nies, par­tic­u­larly those that are not in the oil busi­ness, to raise money straight from for­eign in­vestors, with the goal of ex­pand­ing busi­nesses, di­ver­si­fy­ing the econ­omy and cre­at­ing more jobs for the king­dom’s grow­ing pop­u­la­tion. Be­fore Mon­day, for­eign­ers only could ac­cess the mar­ket in­di­rectly, through a lo­cal Saudi in­sti­tu­tion, which was costly and com­pli­cated.

The stock ex­change’s es­ti­mated value makes it the big­gest in the Mid­dle East. Petro­chem­i­cal firms make up a fifth of Tadawul, with heavy­weights like Saudi Ba­sic In- dus­tries Corp. among those listed.

The move comes at a cru­cial time for Saudi Ara­bia, whose rev­enue has suf­fered from a plunge in oil prices over the past year. That lower rev­enue could con­strain gov­ern­ment spend­ing, which in turn would af­fect the many com­pa­nies re­ly­ing on gov­ern­ment projects. The king­dom has been drawing from its ro­bust for­eign re­serves to main­tain spend­ing.

An in­flux of for­eign money could “help to plug some of the ex­ter­nal short­fall and slow the pace at which Saudi Ara­bia is drawing down its re­serves,” says the Lon­don- based anal­y­sis firm Cap­i­tal Eco­nomics.

The firm says Saudi Ara­bia has been tra­di­tion­ally cau­tious about for­eign in­flu­ence in its po­lit­i­cal and eco­nomic af­fairs. Its de­ci­sion to open its stock mar­ket could be seen as part of a broader lib­er­al­iza­tion ef­fort in the king­dom’s econ­omy. The so­cially and re­li­giously ul­tra­con­ser­va­tive coun­try is al­ready awash in some of the world’s big­gest brands and many multi­na­tional com­pa­nies have their fac­to­ries and fa­cil­i­ties there.

How­ever, for­eign in­vestors say they are tak­ing a cau­tious ap­proach and warn not to ex­pect an im­me­di­ate rush of for­eign in­vest­ment into the Mid­dle East’s big­gest mar­ket.

“In the im­me­di­ate to short term, the money flow will be grad­ual,” says Sachin Mo­hin­dra, Gulf port­fo­lio manager for In­vest AD.

One rea­son for the cau­tious ap­proach: When lo­cal in­vestors an­tic­i­pated the open­ing of the mar­ket, they bid up stock prices, leav­ing them over­val­ued in the opin­ion of fund man­agers.

Ad­di­tion­ally, t here are reg­u­la­tions in place for for­eign in­vestors. Only fi­nan­cial in­sti­tu­tions with US$ 5 bil­lion or more of as­sets un­der man­age­ment that have been in op­er­a­tion for five or more years are el­i­gi­ble to in­vest, thought the reg­u­la­tor says it could make ex­cep­tions.

Other reg­u­la­tions are that qual­i­fied for­eign in­vestors can­not own more than 5 per­cent of the shares of any com­pany. Th­ese in­vestors as a whole can­not own more than 20 per­cent of shares in the roughly 165 listed com­pa­nies.

There are also five com­pa­nies that will be off lim­its to for­eign in­vestors. Most are in con­struc­tion in the Mus­lim holy cities of Mecca and Me­d­ina, which are closed to non- Mus­lims.

The king­dom’s stock mar­ket reg­u­la­tor, the Cap­i­tal Mar­kets Author­ity, says the de­ci­sion to open the mar­ket to di­rect for­eign in­vest­ment is aimed at sup­port­ing in­creased par­tic­i­pa­tion of in­sti­tu­tional in­vestors and re­duc­ing the role of smaller in­vestors.

Ac­cord­ing to Tadawul, Saudi in­di­vid­u­als make up 34.4 per­cent of stock mar­ket own­er­ship, but ac­count for nearly 90 per­cent of trad­ing ac­tiv­ity. That has ex­posed the mar­ket to volatil­ity.

John Sfakiankis, Mid­dle East direc­tor based in Riyadh at emerg­ing mar­kets in­vest­ment firm Ash­more Group, says he does not ex­pect a big in­flux of for­eign in­vest­ment right away. He ex­pects a grad­ual flow over the next few years of US$ 20 bil­lion to US$ 25 bil­lion.


A man walks past por­traits of Saudi lead­ers at the Tadawul Saudi Stock Ex­change, in Riyadh, Saudi Ara­bia on Mon­day, June 15.

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